| Licensing, Technology Transfers, |
There is an epidemic abroad in our land. It is
called “The New Franchisor Scam”. Here’s how it works.
A small group of unscrupulous people with
franchise experience decide to get rich quick by exploiting the inability of
franchise investors to identify reality.
They come up with a “concept” that is a complete
myth – it simply doesn’t exist. Something like it existed in the past and may
have had a successful run. That provides an anchor point. Illustratively, Subway
and other sandwich franchises provide an historical basis on which a group
conjures up a fantasy franchise that they call Dagwood Sandwiches. Dagwood uses
an old comic strip character known in the comics as a person who enjoyed
enormous sandwiches, but was otherwise a complete imbecile. Dagwood Bumstead was
in years past a household word and well known in American culture.
The sales and marketing materials for Dagwood
Sandwiches claim that this is a “proven concept” with great “name recognition”
that is run by franchise professionals who know how to run a franchise brand
system. They manage to convince investors to contribute a capital fund to launch
this new franchise brand, and with that nest egg they sell numerous territory
development contracts to franchise investment high rollers until they have close
to $ 10,000,000. They appear to have financial credibility, and they engage in
aggressive sales tactics, telling prospective franchisee investors that “They
don’t sell franchises. They award them,” Sucker after sucker lines up to be
interviewed as a franchisee candidate. None of these victims has a clue about
how to ascertain if this is real or a complete charade. In a very short time,
the lack of substance results in the total collapse of Dagwood Sandwiches,
leaving all the investors holding empty bags and looking for lawyers to sue the
company and the scoundrels. The company has no money by this time. The
scoundrels either have no money by this time or have carefully concealed the
assets that might be used to satisfy fraud judgments or, in the alternative,
these millions might just have gone up their collective nose.
Of the franchise due diligence resources
available in the United States, only Franchise Remedies – this law firm – saw
through the scam and touted our clients away from this debacle. If this
statement is incorrect, the other franchise due diligence resources that touted
their clients away from Dagwoods are invited to provide solid evidence that they
too saw through this ruse.
The point of this article is to give alarm about
the prospect that any group of scoundrels can invent a mythical franchise
investment opportunity and clothe it in the trappings of a real business
enterprise. They can have real franchise agreement forms and disclosure
documents that appear on their surface to comply with state and federal
disclosure requirements. They launch a sales and marketing campaign that looks
like what a real franchise opportunity might use, and they’re off to the races.
Suckers appear on their doorstep, write checks and sign draconian franchise
agreements that require the investors to agree that things said to them were in
fact not said to them to induce them to purchase the franchise. This is now
standard language in every franchise agreement, and just this week outlawed in
the new FTC Franchise Rule.
In a very short time, the entire project
collapses in ruin. All investors lose all of their investment money.
I have been yelling my head off about the
indispensability of really expert franchise pre investment due diligence
assistance. This scenario will be repeated dozens of times in the near future,
and those who think they are smart enough to see through the scams without
expert due diligence help will continue to be their victims. There is no legal
remedy that is worth anything after you part with your money. Even if you are
correct in your claims that you were defrauded, if the money paid to the
scoundrels has disappeared, you can take you judgment and frame it for wall
decoration. There are theoretical “remedies” that are not real and practical
remedies. You will invest your legal fees in suing these folks in a loser
litigation campaign, losing in legal fees as much as you lost in making the
investment in the first place.
No one can intelligently decide today to risk
upwards of half a million dollars without being willing to pay for competent
killer pre investment due diligence. It isn’t cheap, aggregating upwards of $
5,000. Compared to being fleeced of your entire investment and remaining
obligated to repay loans and perform long term lease obligations, not to mention
the frequent investor bankruptcies, paying for the killer due diligence would be
cheap at twice the price.
If you think you can outsmart professional
swindlers all by yourself, you really are not smarter than a fifth grader.
Copyright 1997 - 2008 || Richard A. Solomon
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 | Licensing, Technology Transfers, |